Is Netflix building a 'House of Cards' in original programming?

by Ben Fritz and Joe Flint

LOS ANGELES — Netflix’s growth strategy may be built on a house of cards, literally.

In a shift, the home entertainment company is in advanced negotiations to acquire “House of Cards,” a political drama series starring and produced by Oscar-winner Kevin Spacey.

Should the deal close, it would represent Netflix’s first foray into original programming. The talks are already raising eyebrows in Hollywood and on Wall Street. Netflix has succeeded primarily as a distributor of previously released movies and television series and has more than 20 million subscribers. Now, instead of selling established content, it wants to get into the riskier game of hawking its own original fare.

If Netflix goes forward, it could be the most prominent test of whether a traditional multimillion-dollar star-laden show can succeed on an Internet platform where people watch when they please and may only learn about the show if a computer algorithm recommends it. Unlike traditional broadcast and cable networks, Netflix won’t be scheduling the show on a certain night and time or running ads to promote it.

“House of Cards,” a remake of a 1990 British miniseries, won’t come cheap. Netflix is in talks with independent producer company Media Rights Capital that call for the company to commit to 26 episodes of the show at a cost of tens of millions of dollars. Most striking is that as part of the deal being discussed, MRC would not have to make a test episode or pilot, according to people close to the talks.

That was enough to send Time Warner’s HBO running to the exits. The pay-TV channel had kicked the tires on “House of Cards,” but going forward with no pilot was a deal killer, people familiar with the network’s thinking said.

As recently as January, Netflix Chief Executive Reed Hastings indicated that original programming had little interest for the company. “We think that we’re better off letting other people take creative risks and get the rewards,” he said on a conference call with analysts.

The change in direction for Netflix comes as it faces escalating costs to acquire content and hold onto the rights it currently has. The most significant challenge it faces, many analysts agree, will be renewing its pact with the pay-cable channel Starz, which gives it access to recent releases from Walt Disney Studios and Sony Pictures.

Janney Capital Markets analyst Tony Wible estimated that for Netflix to renew the agreement, which expires in early 2012, it would have to increase the amount it pays from approximately $30 million per year to $300 million.

Hollywood has a love-hate relationship with Netflix. On the one hand, Netflix has become a prominent buyer of Internet streaming rights, committing billions of dollars in recent multiyear deals with distributors Epix — the cable network with rights to movies from Paramount Pictures, Lionsgate and Metro-Goldwyn-Mayer — as well as with CBS Corp. and Relativity Media. Going into original programming could also mean a new buyer for content, which would also be good news for the studios.

On the other hand, Netflix has drawn the ire of some in entertainment industry who feel it is undermining traditional business models. Time Warner chief executive Jeff Bewkes, whose HBO is directly threatened by Netflix, has been particularly outspoken in his criticism of its business model.

“It’s hard to see how that kind of economics can fit into a service that charges $8 or $10 a month because the math doesn’t work,” he said, citing the lowest prices Netflix charges customers.

Some industry analysts fear that Netflix could be taking too big a gamble by swimming in unfamiliar waters.

“They could be paying a very high price tag for content that does not find an audience,” said Laura Martin, an analyst with Needham & Co. “No way they will get access to a hit show unless it is by accident.”

“Netflix is used to paying for stuff that’s valued-based on how the market has already responded to it,” observed Wible. “In the world of production you increase the risk, but also the reward.”

Interestingly, a person close to the company said Netflix, unlike other programmers, is not interested in being involved in the creative process of making content, including casting and scripts. That is another alarm bell for some.

“If you bring a show to HBO you get people that have helped create hits and know what they’re doing,” Martin said.